With respect to any Series C shares that remain outstanding after June 30, 2019, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the directors of the Corporation, fixed, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series C shares for the period from and including June 30, 2019 up to, but excluding, June 30, 2024, will be 6.210% per annum, being equal to the sum of the 5-year Government of Canada bond yield determined as of today plus 4.81%, in accordance with the terms of the Series C shares.

With respect to any Series D shares that may be issued on June 30, 2019, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the directors of the Corporation, floating rate, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series D shares for the period from and including June 30, 2019 up to, but excluding, September 30, 2019, will be 6.476% per annum, being equal to the sum of the 3-month Government of Canada Treasury Bill yield determined as of today plus 4.81%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series D shares.

Beneficial owners of Series C shares who wish to exercise their Conversion Privilege should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series C shares can meet the deadline to exercise the Conversion Privilege. Such deadline is 5:00 p.m. (Toronto time) on June 17, 2019, as further described in the Corporation’s news release dated May 22, 2019 and in the rights, privileges, restrictions and conditions attaching to the Series C shares, as provided in Article 6 of the Corporation’s restated articles of incorporation dated October 4, 2016.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., EFN.PR.C and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market has regained a little enthusiasm for floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.32% and +1.72%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the EFN.PR.C FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for EFN.PR.C) Trading Price In Current Conditions

Assumed FloatingResetPrice if Implied Billis equal to

FixedReset

Bid Price

Spread

2.00%

1.50%

1.00%

EFN.PR.C

21.31

481bp

21.87

21.40

20.94

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade close to the price of their FixedReset counterparts, EFN.PR.C. Therefore, it seems likely that I will recommend that holders of EFN.PR.C determine whether or not to convert based on their own portfolio considerations and forecast for policy rates, but I will wait until it’s closer to the June 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

TXPR closed at 604.01, down 0.72% on the day. Volume was 2.29-million, on the high side but nothing special in the context of the past thirty days. The low for the day was 601.96, down 1.06%, but the market commenced a slow (and feeble!) recovery just before 2pm.

Click for Big

Note that TXPR’s 52-week low is 596.56 – that’s not too far off!

CPD closed at 12.10, down 0.74% on the day. Volume of 78,406 was slightly above average in the context of the past thirty days.

ZPR closed at 9.73, down 1.02% on the day, after hitting a new 52-week low of 9.65. Volume of 254,914 was the highest of the past thirty days.

Five-year Canada yields were down 9bp to 1.36% today, enough to be considered a glib explanation for the preferred market carnage … although I confess that it still doesn’t make any sense to me why spreads should widen as yields decline! Where are the GIC refugees?

Then the tweets on trade began. In early May, President Trump threatened new tariffs on Chinese products, shattering the calm as markets began a tailspin that was capped with a 1.3 percent drop for the S&P 500 on Friday.

The benchmark index ended May down 6.6 percent, its first monthly decline of the year and its worst drop since an ugly sell-off at the end of 2018.

The decline on Friday came after President Trump tweeted that he would impose a new tariff on all imports from Mexico — a tax that could rise to as high as 25 percent — unless the country’s government took steps to address the flow of migrants across the United States’ border, and Beijing announced plans to unveil a blacklist of foreign companies and people. China’s move was seen as a retaliation against the Trump administration’s efforts to deny American technology to Chinese companies.

Earlier this month, the White House issued an order effectively barring sales by Huawei, China’s leading networking company, broadening the conflict away from trade deficits and toward the difficult-to-resolve issues of technological dominance.…Investors worldwide responded by pricing in the growing economic cost to the fight. Stock markets in trade-dependent economies such as Japan, South Korea and Germany also saw steep losses in May.

On Friday, the drop in American stocks was sweeping: Investors dumped industrial and machinery stocks, shares of consumer products companies, and those of giant tech companies.…To a certain extent, those low yields are pricing in growing expectations that the Federal Reserve will cut interest rates. According to the market for Fed Funds futures, traders are putting roughly 90 percent odds on the Fed cutting interest rates by the end of the year, up from about 38 percent in the middle of April.

Some might consider it strange hubris for Trump to continue shaking his fist at logical allies while locked in a trade war with China – but I don’t consider it out of character at all. By me, he doesn’t care if it’s good policy; he doesn’t care if he can credibly claim a win after the dust has settled; he doesn’t care about the risks to the US economy. His base is convinced that the rest of the world is engaged in constant plotting to take away what is rightfully theirs, and they want a guy who will fight. So he fights. And, if he gets it right, the 29.1% of the voters who select him will outnumber the 28.9% of voters who don’t. That’s all that matters – and he’s proved himself to be a very astute counter of votes in the past.

That’s the dark side of the matter for those poseurs who proclaim their cynicism by not voting. Campaigns cease to be about swinging the undecided and become solely a matter of motivating your base.

There was a great big stack of new 52-week lows set for individual issues today, so the ‘new lows’ section of the newspaper should make for interesting reading!

HIMIPref™ Preferred IndicesThese values reflect the December 2008 revision of the HIMIPref™ IndicesValues are provisional and are finalized monthly

upgraded the long-term ratings of The Toronto-Dominion Bank (TD or the Bank) and its related entities, including TD’s Long-Term Issuer Rating to AA (high) from AA. The Bank’s Short-Term Issuer Rating is confirmed at R-1 (high). The trend on all ratings is now Stable. TD’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA and a Support Assessment (SA) of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Under the new Canadian Bank Recapitalization Regime, DBRS expects to eventually remove the uplift from systemic support once the Bank has issued a sufficient level of bail-inable senior debt, which would thereby provide an adequate buffer for non-bail-inable obligations and is then expected to offset the removal of systemic support.

KEY RATING CONSIDERATIONS
The upgrade of TD’s long-term ratings recognizes the Bank’s improving fundamentals and franchise, including a growing level of earnings in the United States and ongoing strong performance in Canada, as the Bank continues to execute on its lower-risk strategy. DBRS views TD as consistently outperforming most global banks, and the Bank’s upgraded IA is now in line with a few highly regarded U.S. peers. The U.S. retail bank now represents over one-third of the Group’s earnings, which contributes to TD’s geographic diversity. Indeed, the Canadian and U.S. retail operations generate more than 80% of TD’s adjusted net income, providing considerable earnings stability, which is a key factor underpinning the ratings. DBRS notes that the performance of the U.S. franchise has vastly improved as the Bank has built its asset generation capabilities, and it has realized the benefit from margin expansion and lower corporate taxes following U.S. tax reform. However, while historically a source of lower credit risk, TD’s focus on retail lending in Canada, where the consumer is highly levered, makes it somewhat more exposed to a potential downturn in Canada. At present, TD is less exposed (as a percentage of earnings) to capital markets businesses compared with the other large Canadian banks. However, TD is investing to build out its capital markets capabilities, particularly in the United States, which could potentially expose the Bank to greater earnings volatility.

its intention to redeem all of its outstanding Class A Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) (TSX: GRP.PR.A) for cash on June 14, 2019 (the “Redemption Date”) in accordance with the terms of the Series 1 Preferred Shares.

The redemption price per Series 1 Preferred Share will be equal to C$25.00 plus accrued and unpaid dividends as of the Redemption Date of C$0.321181 per share, representing a total redemption price of C$25.321181 per Series 1 Preferred Share (the “Redemption Price”).

Notice will be delivered to holders of Series 1 Preferred Shares in accordance with the terms of the Series 1 Preferred Shares.

From and after the Redemption Date the Series 1 Preferred Shares will cease to be entitled to dividends or any other participation in any distribution of the assets of the Company and the holders thereof shall not be entitled to exercise any of their other rights as shareholders in respect thereof except to receive the Redemption Price (less any tax required to be deducted and withheld by the Company).

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., MFC.PR.L and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have lost its fleeting interest in floating rate product, although it may be picking up again; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.27% and +1.29%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the MFC.PR.L FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for MFC.PR.L) Trading Price In Current Conditions

Assumed FloatingResetPrice if Implied Billis equal to

FixedReset

Bid Price

Spread

2.00%

1.50%

1.00%

MFC.PR.L

17.15

216bp

17.52

17.03

16.53

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade close to the price of their FixedReset counterparts, MFC.PR.L. Therefore, I recommend that holders of MFC.PR.L determine whether or not to convert based on their own portfolio considerations and forecast for policy rates. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on June 4, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

Recent Canadian economic data are in line with the projections in the Bank’s April Monetary Policy Report (MPR), with accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup starting in the second quarter. The oil sector is beginning to recover as production increases and prices remain above recent lows. Meanwhile, housing market indicators point to a more stable national market, albeit with continued weakness in some regions.

Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary. Recent data support a pickup in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed. That said, inventories rose sharply in the first quarter, which may dampen production growth in coming months.

The global economy is also evolving largely as expected since April, although the recent escalation of trade conflicts is heightening uncertainty about economic prospects. In addition, trade restrictions introduced by China are having direct effects on Canadian exports. In contrast, the removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA will have positive implications for Canadian exports and investment.

Inflation has evolved in line with the Bank’s April projection. The Bank expects CPI inflation to remain around the 2 per cent target in the coming months. Core inflation measures all remain close to 2 per cent.

Overall, recent data have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased. In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate. In taking future policy decisions, Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment.

It’s too bad that the names of those voting in favour of the hold were not released and neither were the names and summarized rationales for those voting against. Only confident Central Banks with committees comprised of stellar people who can make a living doing something else publish such information.

Fears that an escalating trade war between the United States and China will slash global economic growth pulled world stock markets down to near two-and-a-half-month lows on Wednesday and continued to feed a rally in safe-haven government bonds.

German bond yields fell deeper into negative territory and inched toward record lows of minus 0.2 per cent. Ten-year U.S. Treasury note yields dropped to 20-month lows, having fallen almost 30 basis points this month.

Chinese newspapers warned on Wednesday that Beijing could use rare earths to strike back at the United States after U.S. President Donald Trump remarked he was “not yet ready” to make a deal with China over trade. China was the source of 80 per cent of the rare earths imported by the United States between 2014 and 2017.

The prospect of a prolonged standoff between the world’s two biggest economies and the likelihood of Europe and Japan getting dragged in have raised investor concerns about global growth.…Canada’s main stock index fell on Wednesday as the Bank of Canada held interest rates steady as expected.

The Toronto Stock Exchange’s S&P/TSX Composite index was unofficially down 165.99 points, or 1.02 per cent, at 16,131.47

Canadian debt rating agency DBRS Ltd. is falling into the hands of U.S. investment research firm Morningstar Inc., marking its second ownership change in five years and the largest deal in Morningstar’s history.

Founded by Canadian Walter Schroeder and based in Toronto, DBRS was first sold in 2014 to two private equity firms, Carlyle Group and Warburg Pincus, for a reported US$500-million. Five years later, the private equity owners are selling DBRS to Morningstar for US$669-million.

Returns for the two private equity firms were not disclosed, and the sale price does not include any dividends that DBRS may have paid out over the past five years.

Scotiabank (BNS: TSX, NYSE) today announced that Scotiabank Tier 1 Trust, a closed-end trust wholly owned by The Bank of Nova Scotia, intends to redeem all outstanding 7.802% Scotiabank Tier 1 Securities – Series 2009-1 due June 30, 2108 (the “Scotia BaTS III Series 2009-1”) for 100% of their principal amount, together with accrued and unpaid interest to the redemption date. The redemption will occur on June 30, 2019. Formal notice will be delivered to Scotia BaTS III Series 2009-1 holders in accordance with the terms of the offering.

Scotia BaTS III Series 2009-1 constitute Additional Tier 1 capital of the Bank. The principal amount of Scotia BaTS III Series 2009-1 is currently $650,000,000. The redemption of the Scotia BaTS III Series 2009-1 will be financed out of the general funds of Scotiabank Tier 1 Trust.

PerpetualDiscounts now yield 5.48%, equivalent to 7.12% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.66%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 345bp, a slight (and perhaps spurious) widening from the 340bp reported May 22.

HIMIPref™ Preferred IndicesThese values reflect the December 2008 revision of the HIMIPref™ IndicesValues are provisional and are finalized monthly

The International Association of Insurance Supervisors released its May, 2019, Newsletter today, which was led by a piece from the Secretary-General, Jonathan Dixon:

Our committee meetings next month in Buenos Aires mark an important point in the IAIS’ journey to a global Insurance Capital Standard (ICS). The IAIS embarked on the development of the ICS to create a common language
for supervisory discussions of group solvency of internationally active insurance groups. In June, the focus of our committee discussions will shift from design to implementation issues.

The final round of field testing is now underway, with data due at the end of July. While some ICS design elements remain to be finalised this year, the IAIS remains committed to resolving those elements and beginning the monitoring period in 2020, while recognising that the ICS will continue to evolve during this period. This includes possible refinements and corrections of major flaws or unintended consequences identified during the monitoring period.

In June, we will discuss the overall framework for the monitoring period, including confidentiality safeguards around disclosure of the ICS results and modalities for considering unintended consequences, given that our intention has always been to undertake this work once the ICS is sufficiently developed. We will also further our discussions on the timelines, process and governance for developing comparability criteria and completing the comparability assessment of other solvency regimes relative to the ICS.

As we move towards November and the adoption of ICS Version 2.0 for the monitoring period, we will continue our constructive engagement with stakeholders in order to ensure that there is greater clarity on the process for finalising and implementing the ICS.

This is all consistent with previous schedules provided for ICS 2.0, which include the IAIS deliberations regarding the definition of Insurance company Tier 1 Limited Capital (which includes preferred shares); I take the view that rules comparable, if not identical to the bank NVCC rules will be imposed by OSFI at some point in the future.

Yield Calculation Conventions

Meta

Registration Problems?

Assiduous Readers are required to register prior to commenting on my posts, which helps reduce the volume of spam. In turn, registration requires that the A.R. respond to an eMail that will be sent automatically and immediately upon completion of the registration form

If you do not receive this eMail, it has probably been intercepted by your software or ISP as spam. Try sending an eMail to wordpress@prefblog.com; this will usually result in your being able to receive future eMails. Then you may log in; tell the machine you have forgotten your password and it will eMail one to you.

Sorry about all this rigamarole. If all else fails, send me an eMail and I'll sort things out.